US Tax Court cases in a nutshell. There are so many ambiguous areas of the tax code in which the IRS falls back on the old stand by "we'll consider all the facts and circumstances to determine if your position on a tax return should be supported." Tax court cases show us the IRS in action doing just that! (Please note that blogs may include sections copied directly from court case decisions found at ustaxcourt.gov)

Wednesday, January 11, 2012

The ‘Columbian Laundry-ing?’ Case

Taxpayers were assessed a deficiency on the total disallowance of all $134k of cost of good sold expenses claimed against $161k of income because they did not keep adequate records. Taxpayers’ business was to buy clothing in the US and export it to Columbia.

Take Aways:

• The IRS filed the notice of deficiency about 2 years after the return was filed so just because you file a return and don’t hear anything for awhile, it is not correct to assume everything is copasetic.

• The court found TP’s receipts bad evidence because they: did not indicate which purchases of clothing were for export and which purchases were for the Gaitans’ personal use; in some cases, were illegible/did not clearly identify the purchaser, or had been deducted on their other schedule C. (If you are a retailer, it is probably best to show some withdraw of inventory for personal use vs. none at all.)

• The court would not admit credit card statement evidence because she was without the supporting receipts or other evidence corroborating that the purchases reflected on the American Express statements were purchases of business inventory. In addition, some months were missing which may have reflected credits/refunds. (We regularly advise our clients that they need to retain the actual merchant receipt – not just the statement. That is like having cancelled checks with no record of the invoices you paid.)

• The court would have been able to estimate all but vehicle expense if she had brought more to the table. She did not even have evidence of any clothes being shipped out of the US. (Husband owned a car wash by the way. Hmmm…Saul from Breaking Bad is coming to mind here…)

• The TP also lost the much smaller deduction for travel because she failed to prove that the trips were PRIMARILY for business. Many people think if they do any business on a trip it is deductible, but the burden of proof (for within the contiguous US) is the PRIMARY purpose. There can be many purposes but only one PRIMARY purpose.